Updated: Jul 21, 2022
Investment Climate in the Real Estate Sector
Rate increases, recession, falling prices and higher costs. Doom and gloom seems to dominate the headlines these days, on all investment fronts from crypto to real estate and stocks. These are the times when it is best to take a step back and re evaluate your goals in investing. It bears repeating that real estate is a long term investment. If you purchased in December 2021 hoping to double your money by June 2022, you are probably in for a surprise. The market has softened considerably since then, due to aggressive rate hikes by the Bank of Canada. However, if you look at the year over year numbers, the average price of homes sold in May 2022 was $850,037, a gain of 23.1% from May 2021. That’s hardly a bear market, even if the prices have come down from January. Let’s dive into some of the factors driving the market today.
People shop payments, not prices. When the cost of borrowing goes up, the price of homes either comes down to match or more people get priced out of the market. Where will rates go from here? If you believe what the Bank of Canada forecasts, there will be another 5 or 6 rate hikes this year. It’s all but guaranteed that there will be another .75% increase in the overnight lending rate at the next policy decision in July 2022. That will push prime rates to 4.45%. I would argue that as more free cash flow gets eaten up by higher interest rates, consumer spending will slow, inflation will come down but prices will remain elevated, recessionary forces will mount on the horizon and we will start to see rates cuts by next year. Yes, cuts.
Less homes are getting sold. On a year-to-date basis, home sales totaled 3,569 units over the first five months of the year. This was a decline of 24% from the same period in 2021.
Prices are still elevated on a YOY basis. The MLS® Home Price Index (HPI) tracks price trends far more accurately than is possible using average or median price measures. The overall MLS® HPI composite benchmark price was $790,500 in May 2022, a sizable gain of 22.1% compared to May 2021.
More homes are coming on the market, but active listings are still low. The number of new listings saw a sizable gain of 20.4% from May 2021. There were 1,613 new residential listings in May 2022. This was also the largest number of new listings added in the month of May in history. Active listings were 5.6% below the five-year average and 19.6% below the 10-year average for the month of May.
Months of inventory is still below average. Months of inventory numbered 2.4 at the end of May 2022, up from the 0.9 months recorded at the end of May 2021 and below the long-run average of 2.6 months for this time of year. The number of months of inventory is the number of months it would take to sell current inventories at the current rate of sales activity.
What does this mean?
People are approaching the real estate market with caution. Homes are still selling, however people are not getting into multiple offer situations as often as before. The wait and see approach seems to be the name of the game. There is still high confidence in the market, but the exuberance seen earlier is gone.
We are in a liquidity crunch. If you are like me, you own some long-term properties that have been relatively unaffected by rising rates, but you also have some properties that were purchased in the last 12 months that are now in a negative cash flow scenario due to rising rates. Heck, the numbers looked great when variable rates were less than 2%, but now that they’re pushing 4% all cash flow has been eaten up and you’re finding yourself dumping money into the account every month.
The money you make over the next year might only be mortgage pay down and that’s not necessarily a bad thing. Nothing goes up forever. Real estate is a business. Like every business, there are average years, great years, and bad years. It happens. If you focus on good properties that have a solid tenant profile, you will be in a great situation over the long term. Make sure you have access to credit, cash or cash flowing businesses to help you through the rough spots.
Protect Your Purchasing Power
Assets win in these environments over the long term. I like physical things that I can control, or at least research and understand the fundamentals behind them. Here is how I balance my portfolio. I keep enough cash on hand to pay for day to day expenses and unforeseen circumstances. The rest looks something like this.
Physical gold and silver – 5%
Bitcoin – 5%
Stocks – 15%
Real Estate - 75%
These values fluctuate with the market (73% drop in bitcoin, anyone?), but overall, this is the balance that I try to keep. This doesn’t work for everyone though, so figure out your way to weather whatever financial storms are coming our way.
Jonathan Beam is a real estate investor in the Niagara region who is passionate about helping you achieve financial freedom through real estate. He works with new and experienced investors to formulate a plan that fits your specific situation and provides market guidance and consultation on the best places and strategies to pursue within the Niagara Region. Book a free, half hour no obligation consultation to see how he can help you to achieve your goals. His travels are available at www.realestateandrepeat.com
For a free market analysis on 2 markets within the Niagara region that we are currently investing in, please visit the home page and fill in the contact form at the bottom for your free report!